FB Stock at Risk – Sell Facebook Before Earnings and User Declines

Declines in both U.S. and Europe users are a real possibility this quarter

Facebook (FB) is set to report earnings on Jan. 29, and FB stock investors need to prepare for some bad news.

Facebook has seen slowing growth in its user base in key western markets, and there’s a very good chance that this earnings report could be the first to show quarter-over-quarter declines in Europe or North America — or both.

Click to Enlarge The chart that I am most interested in from Facebook earnings in October shows total global users. Take a look and consider that from Q2 to Q3, U.S. & Canada users were up by an anemic 0.5% while Europe users were up just 1.4%.

These are by far the most lucrative regions for Facebook. About $962 million of Facebook’s $2 billion in revenue last quarter — or 48% — came from its U.S. & Canada segment.

Sure, revenue per user metrics continue to point up. And fundamentally, that’s why investors continue to buy FB stock. After all, there are only so many human beings and 100% market saturation of the planet earth is a little naive … though I doubt CEO Mark Zuckerberg would see it that way.

But the question investors must answer in Facebook earnings at the end of January is whether revenue per user metrics can grow fast enough to offset declines in Europe and/or America AND provide growth AND provide that growth at a rate that justifies the earnings multiple.

Considering FB stock has roughly doubled since July, I am skeptical.

Besides, don’t forget the powerful sentiment overhang that will be created by headlines on every website trumpeting Facebook user declines. That’s surely not going to be shrugged off easily by FB stock investors — especially after we’ve been fed the narrative of fleeing teens for months now.

And bigger-picture, it’s undeniable the froth that exists in social media stocks after the Twitter (TWTR) IPO. The nosebleed valuations on companies from Twitter to LinkedIn (LNKD) to Yelp (YELP) should give you pause, and investors sitting on doublers or triplers in these positions should seriously consider trimming back.

I don’t own Facebook stock. But if I did, I would take my profits and run well in advance of Q4 earnings.